Question
3. You want to buy a stock that is currently selling for $50. You forecast that in one year, the stocks price will be either
3. You want to buy a stock that is currently selling for $50. You forecast that in one year, the stocks price will be either $60 or $45, with equal probabilities. There is a one-year call option on the stock available with an exercise price of $44. You are able to borrow at a rate of 5.50%. You would like to hedge your stock position using some number of the call options.
a) What is the hedge ratio you should use? (how many calls should you buy (short) to offset 1 share of stock).
b) What would be the certain dollar payout one year from today for the hedged portfolio that includes one share of stock and h number of call options?
c) What is the present value today of that portfolio which consists of a share of stock and h number of calls?
d) What is the value of a one-year call option on the stock available with an exercise price of $44?
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